NEW YORK (Reuters) - U.S. stocks dropped on Monday as McDonald's quarterly earnings missed expectations and the latest signs from Spain pointed to a euro-zone debt crisis that keeps getting worse.
Earnings from McDonald's Corp became the latest casualty among large multinational companies after the world's biggest hamburger chain posted lower-than-expected profit, citing a slower global economy and a stronger dollar. McDonald's stock slid 3.2 percent to $88.68. It was the biggest drag on the Dow.
The high-profile earnings disappointments have taken a toll on third-quarter estimates. Third-quarter S&P 500 earnings growth is now expected to come in at 0.9 percent, down from 3.1 percent at the beginning of the month.
In the latest development in the euro-zone crisis, the Spanish region of Murcia looked set to follow Valencia in tapping a government program to keep its finances afloat. Local media reported half a dozen regions were ready to follow suit.
The International Monetary Fund dismissed a weekend news report, which had increased concerns about the region, that it may refuse to continue supporting Greece as it prepares for talks with the new Greek government on its international bailout.
"All it does is it brings up that whole crisis again - all that tells you, it really didn't go away. No one has really fixed anything," said Ken Polcari, managing director at ICAP Equities in New York.
"For a couple of weeks there, it was quiet so people weren't paying attention (to Europe) but the minute they opened their mouth - boom."
Energy shares also slumped as fears of a global slowdown prompted investors to shun riskier assets, with U.S. crude down more than 3 percent at $88.93 a barrel. Chevron Corp (CVX.N) dropped 2 percent to $107.02. The NYSE Arca oil index .XOI lost 2.5 percent.
The Dow Jones industrial average .DJI dropped 161.69 points, or 1.26 percent, to 12,660.88. The Standard & Poor's 500 Index .SPX fell 19.49 points, or 1.43 percent, to 1,343.17. The Nasdaq Composite Index lost 53.24 points, or 1.82 percent, to 2,872.06.
Stocks appeared to stabilize as the S&P 500 approached its 50-day moving average of 1,332.98, a technical support level that could trigger more losses if convincingly broken.
The CBOE Volatility Index, or VIX, Wall Street's fear gauge, jumped nearly 26 percent - its biggest percentage gain since November - when it touched a session high of 20.49. By midday, the VIX had given up some gains to trade at 18.99 - slightly below 20, a level that's considered relatively low - although it was still up nearly 17 percent for the day so far.
"While the actual VIX level is quite low at the moment, some of the volatility-related indicators are waving the flag of caution this week," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab.
According to the VIX Open Interest Put-to-Call ratio, VIX options traders are holding only 50 puts for every 100 calls outstanding on the VIX. The last time this ratio hit this level was early August of 2011, just before a huge volatility spike that lasted nearly four months, he said.
"While QE3 is starting to look more realistic than it has in recent months," Frederick said, "I still think the VIX is not currently reflecting the true risk in the marketplace."
The euro slid to a two-year low against the dollar and a near 12-year trough against the yen, pressured by fears that Spain may eventually need a full sovereign bailout.
The yield on the Spanish 10-year bond was last at 7.5 percent, well over what analysts consider a sustainable level.
(Reporting by Chuck Mikolajczak, Additional reporting by Angela Moon; Editing by Jan Paschal)